Bernanke On Soaring Interest Rates: "We Were A Little Puzzled By That"

Tyler Durden's picture

Almost exactly 8 years after Greenspan's now infamous "conundrum" comments about the unprecedented persistence of low, long-term interest rates, Bernanke is now "puzzled" at the dramatic rise in interest rates following his recent Taper remarks. Have no fear though, just as Greenspan noted, "I'm reasonably certain we would not automatically assume that it would mean what it meant in the past, " Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy."

Perhaps more importantly, today for the first time someone, not Hilsenrath of course, had the guts to ask Bernanke the hardest question: is the Fed's "Stock not Flow" worldview broken, and was it wrong all along (as we have been alleging all along)? Of course, the implications of the Fed being wrong on this most critical aspect of monetary theory opens up a hornet's next of Pandora's boxes: just what else is the Fed wrong about, and how much will Bernanke be "puzzled" when one by one all of his flawed theories are revealed to be nothing but religious dogma.

And finally what happens to the BOJ when it too has to "taper" and it too realizes that it is all about the flow (in a country where the central bank is monetizing at a relative pace which is more than double the Fed's), and the second sentiment shifts, the entire liquidity bubble comes crashing down, taking not only Japan, but Europe - which is funded courtesy of the Japan carry trade - down with it?

To summarize: bonds collapsing - no worries... it's still the Stock... although not really... and optimism.

From today's press conference:

QUESTION: Mr. Chairman, you've always argued that it's the stock of assets that the Federal Reserve holds which affects long-term interest rates.


How do you reconcile that with the very sharp rise in real interest rates that we've seen in recent weeks? And do you think the market is correctly interpreting what you think is most likely to be the future path of the Federal Reserve's stock of assets? Thank you.


BERNANKE: Well, we -- we were a little puzzled by that. It was -- it was bigger than can be explained, I think, by changes in the ultimate stock of asset purchases within reasonable ranges, so I think we have to conclude that there are other factors at work, as well, including, again, some optimism about the economy, maybe some uncertainty arising. So I'm agreeing with you that -- that it seems larger than can be explained by a changing view of monetary policy.


It's difficult to judge whether the markets are in sync or not. Generally speaking, though, I think that what I've seen from analysts and market participants is -- is not wildly different from what, you know, the committee is thinking and trying -- as I tried today to communicate, I think the most important thing that I just want to convey again is -- is that it's important not to say this date, that date, this time.


It's important to understand that our policies are economic-dependent, and in particular, if financial conditions move in a way that make this economic scenario unlikely, for example, then that would be a reason for us to adjust our policy.

It's really the stock, stupid... (right?)

BERNANKE: And by the same token, as long as we're buying assets, we're adding to our holdings.


We do believe -- although, you know, there's room for debate -- we do believe that the primary effect of our -- of our purchases is through the stock that we hold, because that stock has been withdrawn from markets, and the prices of those assets have to adjust to balance supply and demand, and we've taken out some of the supply, and so the prices go up, the yields go down. So that seems to me consistent with the -- with the idea that we're still adding liquidity, we're still adding accommodation to the system.

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Pladizow's picture

Id take advice from a fortune cookie over Ben!

Divided States of America's picture

The savior of the financial world just got his ass reamed today....We are so FUCKED.

Oldwood's picture

It doesn't matter if he came out crosseyed and slobering, nobody cares if he knows what he is doing. The only thing that is important is that everyone believes that he, like his European and Japanese bretherin, will do whatever it takes, and that usually means more free money.

Pinto Currency's picture



Puzzled like a lizard on rail tracks to an oncoming locomotive.

What he means is "We don't want to talk about that or acknowledge that as a problem."

jbvtme's picture

i pray this guy stands trial in a state that still has the death penalty...

espirit's picture

If I have a valuable asset that I care to loan out, I can charge whatever interest the market will bear.  Problem being that there is little collateral not already hypothecated.

House of cards with cracks in the foundation.

Just saying.

toys for tits's picture

It's a house of cards with a sinkhole starting nearby.

(Hopefully one that will swallow, and not spit, B.B.).

Chupacabra-322's picture

You know what Ben, I'm a little puzzled as to why you're not in a pound me in the ass Prison. Criminal.

Spirit Of Truth's picture

It's important to be careful about what "god" to place one's faith in.  Somehow "Federal Reserve Notes" seem seriously flawed in their conception and current "valuation".

Son of Loki's picture

"Not to worry. The problem is compartmentalized to the financial industry."

Atomizer's picture

Price discovery seems to rear its ugly head.

Lore's picture

I hereby nominate this young lady to take Bernank's place as new Fed Head:

MISS UTAH USA 2013 (c/o YouTube)

markettime's picture

Time for stocks to go back to thier rightful owners instead of in the hands of all the wanna-be traders. 

James_Cole's picture

He seems to know exactly what he's doing, sometimes I give people the benefit of bias when considering sincerity but Bernanke doesn't need that, the guy is a terrible liar. He's doing a good job though - as long as you acknowledge what his actual job is. 

Though, on the other hand people take his ridiculous statements seriously so maybe he's not such a bad liar. 

NotApplicable's picture

Perhaps his goal is to completely shut down the brain of anyone paying attention?

James_Cole's picture

That was Greenspan's mo and considering Bernanke copies everything the saint did probably a good explanation.

francis_sawyer's picture

"The savior of the financial world just got his ass reamed today....We are so FUCKED."


The savior of the financial world just got his ass reamed today....We are one step BEYOND from BLUEBUCK slave/serfdom...

There... fixed it...


& meanwhile... & for your musical pleasure...

1000 splendid suns's picture

His goal is to stay the course of the cabal's wishes of collapsing the entire monetary system. What he struggles with is maintaining a straight face as he lies his ass off. He wouldn't find his way out of a paper bag if his puppet masters didn't want him to.


depression's picture

Unchecked Arrogance.

Let's see how the Fed Fucks deal with $200 Oill and the 10-year yeild at 6% by Christmas.

Bond Vigilante's are back bitchez.

putaipan's picture

having seen the losss of the dollar as the 'worlds' reserve currency" is this the collapse of the bond market of which they speak? eagerly awaiting yer' response.

Son of Loki's picture

James, I have to agree with you when you understand the Fed is owned by Banks and Bankers have been handed record high bonuses since the "Great Recession" began. So, in that sense Bernanke is a huge success.

ZerOhead's picture

Major fail. We are so incredibly & unbelievably fucked...

If he even thinks about taking that QE saline drip (ran out of real blood years ago...) out of the arm of the completely banked out and sucked dry consumption-based beast formerly known as the U.S. economy it's all over...

Yancey Ward's picture

We should be so lucky as to actually get fucked.

greatbeard's picture

>> lucky as to actually get fucked.

I'm a gold bug.  I got fucked.  How come I don't feel lucky?

Beam Me Up Scotty's picture

You haven't had an orgasm yet.  Let your wife go first.  Then its your turn to blow your load.  Then you will feel lucky.

When gold's the only thing people will trade you for food for or silver, you will feel lucky as hell.  So lucky you won't just smoke one cigarette, you will smoke a whole pack.

Droel's picture

Sorry.  Everyone got fucked today.

Panafrican Funktron Robot's picture

"If he even thinks about taking that QE saline drip"

Just popping back in to note that it actually doesn't matter whether he tapers or not.  

Taper:  yields go up, all manner of fun things like IR swaps/derivs blow up

No-Taper:  remaining liquidity (tier 1 capital) dries up further, bank spreads expload, "liquidity crisis 2.0"

The only way out:  Moar UST issuance by .gov.  There is only one meaningful mechanism to make that happen quickly.  War!

MiltonFriedmansNightmare's picture

And the winner is.......PF, who just nailed a game winning 3 from half court.

MiltonFriedmansNightmare's picture

Sorry PF just accidentally hit the down arrow (yours is the comment of the day winner IMO)

Schmuck Raker's picture

@ Milt - You can change your vote at any time.

YC2's picture

Yes from meaningless to another shade of meaningless

DeadFred's picture

If you vote red by mistake just click on the green. Since the NSA servers remember your vote they will automatically subtract one red and add a green. Sweet- and you thought the government was totally worthless!

Schmuck Raker's picture

I wonder which particular type of cunt down arrowed me for what I thought to be a useful, helpful comment.

Operative word: cunt. (All apologies to North American females.)

EatYourCornTakeyourPill's picture

Why would tier 1 capital dry up though if he doesn't taper? I don't understand, isn't he giving the banks free money to buy USTs

pods's picture

The scheme only works if there are new issue treasuries, otherwise the banks are slitting their own throats.

If the government actually balanced it's budget (ie austerity) this ship would be on the bottom already in a deflationary implosion not seen since the Thresher.

Our system depends on continually expanding debt to function. 

Aggregate debt must rise or shit gets icky, and quick.  With derivatives, this will blow up the system, and the banks, in a flash.


SDShack's picture

Investment Banks buy UST, repackage them to sell to investors, and sell their non-performing MBS to the Fed, which the Fed gladly buys for a premium. This allows the Investment Bank to more than offset their new money cost from the Fed with their profits from unloading their underwater MBS. This investment profit can then be used to buy stocks to keep inflating that bubble. The bottom line is there is no flow because none of the money gets circulated back into the REAL economy. Businesses are hoarding cash because no REAL loans to people or businesses are being made because the Invesment Banks can make much more shifting the pea under the various government shells.

neidermeyer's picture

You're full of good news aren't you...

Sweet Chicken's picture

I posted this in the deer in headlights thread, I'm hoping someone can help. Can anyone one please point me in the direction of an article that will help me educate someone about all of this?! I do not have a good enough grasp to do so. Thank you in advance. :)

Dr. No's picture

You need a Phd in Econ from and Ivy league school to understand this.  If you dont, you don't know dick.

noless's picture

The thesis of the frn collapsing due to money printing.

They have been buying treasuries openly and surreptitiously, to keep the interest rate paid by the federal government artificially low, the problem is right now adjusted to inflation real yields are zero to negative.

The hypothesis is that there is no way to decelerate fed purchases of government debt, because there would be no purchaser, hence, the government couldn't find itself without outright money printing which could potentially crush the currency over night through hyperinflation (and the world economy).

A concurrent part to this is that if no one will buy the debt then the fed has to, but eventually even that won't be enough, , because if they are literally the only buyer, then its the same scenario as above., as no one will believe their dollars are real when there is no need to work for them (or maybe not, i still work, no idea why..), as the government prints money openly as handouts.

The only other option is for interest rates to rise, which will also bankrupt the government, as interest outlays quickly hamper their ability to pay their obligations (welfare, defense, pensions (which leads to a self reinforcing cycle of lower taxes and eventual hyper inflation and/or default)).

The point is that the fed has literally no options, and its only a matter of time, and interest rates rising so sharply (it might look like a small percentage, but its on trillions of dollars in debt..) Is a clear sign that they might not have as much control as the think (or pretend).

I hope that was useful.

In a nutshell, once they can no longer hide the fact that they are printing money, the entire incentive structure Of the economy based on federal reserve notes ceases to function. (that's still a pretty big part by the way)

Sweet Chicken's picture

Thank you noless that was well written. Salute

Dingleberry's picture

I can make it simpler: if the fed announces it is withdrawing from QE, it will be front run by every HFT in the known universe. No one in their right mind would hold bonds. NO ONE.  It will be such a vicious cycle down that I don't think the fed could even print fast enough to cover losses. 

prains's picture

The point is that the fed has literally no options


option#3 = MOAR WOAR


this financial weapon of mass destruction does have an ending and they will control its start, hope to control its middle and disappear at its end

SDShack's picture

Here's a long one sentence explanation...The Fed is using the Investment Banks (which are now Retail Banks + Investment Banks due to the expiration of Glass-Stegal) to EFFECTIVELY monetize the ever exponentially growing US Debt... and Bernake will swear the Fed doesn't monetize the US Debt even as he is doing it.

phoolish's picture

Actually, I think he'll need to be increasing QE just to hold things steady (LOL - sort of - that is, hold the S&P steady while Main Street burns).  Market is fully habituated to this level of juice and is demanding MORE.

fonzannoon's picture

Divided States are all the questions pre screened? Because that question was a landmine. It was a page right out of ZH book, I can't believe it got in there.

It would be funny if she asked it and before he tried to answer she said "Just kidding, my question is, how's your family?"